Accenture Banking 2020 POV

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  • 8/10/2019 Accenture Banking 2020 POV

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    Banking 2020As the Storm Abates,

    North American Banks Must

    Chart a New Course to Capture

    Emerging Opportunities

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    As challenging as thecurrent operating

    environment is, we believethe banking sector in 2020is a land of opportunity

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    For North American banks, the storm haspassed, but theyre still taking on water.Five years after the global financial crisis,many banks have made significant stridesto recover, but they are struggling togenerate sustainable organic growth and

    return to pre-crisis profit levels. Goneare the 20 percent-plus rates of pre-taxreturn on equity (RoE). In the currentenvironment, some are still straining toachieve profitability levels above their costof capital. As a result, they cannot easilyand consistently create shareholder value.

    Unfortunately, the next decade doesnt lookto be any easier. A number of emergingtrendsincluding digital technologyand rapid-fire changes in customerpreferencesare threatening to weighdown those full-service banks that limit

    themselves to products and services thatget distributed primarily through physicalchannels, particularly branches. Given thescale of these disruptions, our analysisshows that full-service banks, as a group,could lose about 35 percent of their marketshare by 2020.1Who gains this marketshare? Digitally oriented disruptors thatare far more agile and innovativetheequivalent of speedboats competing againstschooners. Some of these will be newentrants to the market, and others will be

    todays full-service banks that revamp theirbusiness modelsor some parts of theirorganizationby streamlining operations tobetter meet consumer needs.

    However, as challenging as the currentoperating environment is, we believethe banking sector in 2020 is a land ofopportunityprovided that banks trimtheir sails to better adjust to emergingheadwinds. In fact, banks that can match

    the agility and innovation potential of otheindustries could consistently reap pre-taxRoE levels as high as 18-25 percent by2020. That represents a huge jump over theaverage 11 percent Pre-Tax RoE the largestbanks in North America managed at theend of 2012 (see Exhibit 1).

    EXHIBIT 1Agility and innovation are becoming critical for banks, and high performers can regain ROE levels as high as 18-25 percent.

    Pre-Crisis

    Pre-Tax Core RoE %

    High Performers ofthe Future

    Average Performers

    Status Quo(continuedoptimization and

    simplification only

    Not Sustainable)

    Crisis Recovery Era of ConvergentDisruption

    24.2%

    19.9%21.3%

    24.8%

    20.3%20.8% 20.5%

    13.3%

    -3.3%

    3.2%

    8.5%9.8%

    +1.1%

    -5%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    2000 2002 2004 2006 2008 2010 2012 2020

    +2.4%

    +3.5%

    +1%

    12%

    +3.4%18%

    +2.5%

    25%

    Optim

    izationand

    Simp

    lification

    Agility

    Innovation

    11.0%

    2013 Accenture. All rights reserved

    Source: Accenture Research Analysis Using SNL Financial Data. Historical, Current and Projected Financial Performance of TodaysTop 22 NA Banks With >$50bn in Assets

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    What makes the current environment sochallenging is a set of disruptions thatcurrently impact banks from all sides,a phenomenon that we call convergentdisruption (see Exhibit 2.) Externally, newcompetitors are quickly emerging in themarketoften from outside the traditionalbanking sectorcreating new threats fortraditional full-service providers. At thesame time, ongoing convergence betweenbanks and other players, in areas like

    payments, telecommunications and retail,is creating new competition and innovativeways to do business.

    Regulations are a factor as well. New ruleswill increase capital requirements and costthe average bank 2.5-3.5 percent in pre-tax RoE. A grim economic outlook for thenext few yearswith the Federal Reserveaiming to keep benchmark interest ratesat historically low levelswill prolong theindustrys current headwinds. New entrants,once regulated, may not survive if they fail

    to price for the impact of regulations early.And consolidation will continue to play outbetween now and 2020, by which point weestimate that 15 to 25 percent of todaysroughly 7,000 North American financialinstitutions could be gone.

    Most notably, digital shiftsboth insideand outside of the industryare rapidlyredefining information flows and theway that service providers and customersinteract, while dramatically cuttingdistribution costs to unprecedented levels.

    Digital banking is becoming essential.Consumers view online banking as thesingle most important area in which banksshould invest and develop. Meanwhile,mobile banking activity has increased nearly50 percent since 2012 (see Exhibit 3).

    The Era of Convergent Disruption

    EXHIBIT 2Disruptive factors are impacting banks from all sides.

    EXHIBIT 3Where consumers believe their primary bank providers should be investing.

    Inside Outside

    StructuralChange

    CustomerEmpowerment

    EmergingNew

    Entrants

    OngoingIndustry

    Convergence

    DigitalInside and

    Outside

    ExpandedRegulation

    SubduedEconomicOutlook

    ContinuedConsolidation

    2013 Accenture. All ri hts reserved

    2013 Accenture. All rights reserved

    Source: Accenture 2013 US Retail Banking Survey

    Mobile Banking 20%Mobile banking has increased nearly

    50% since 2012.

    Social Media 7%

    Call Center 12%

    ATM 21%

    Branch 38%

    Online Banking 43%

    Traditional Digital

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    Social media is also changing the way peoplebuy and sell, potentially relying less ontraditional bank advisors and more on friendsand others who offer advice through digitalplatforms. Technology tools (e.g., tabletsand smart phones) and greater transparency

    regarding pricing and services areempowering customers like never before. Asa result, large full-service banks run the riskof being outmaneuvered by digitally orientedcompetitors. Placing their strategic focuson best serving customers, these emergingcompetitors operate and adapt more quickly,creating new tools and services that quicklybecome the industry standard.

    The focus on digital, like the othertrends, represents both a threat and anopportunity. The era of physical scale

    is over, and banks can no longer winthrough size and operational footprintalone. Instead, leaders will win byfinding innovative ways to improve thecustomer experience and adapting tomarket changesthey will feature bothscale and flexibility. The current era ofconvergent disruption may ease in time,but permanent volatility will increasinglybecome the norm. This volatility in theexternal environmentmarked by factorsin the external environment such as an

    unstable housing market, interest rates,and economic and market cyclesisseverely impacting the banking industry,creating risks for slow-footed banks butopportunities for those that can becomemore agile and innovative.

    Specifically, we think that three newbusiness models will emerge to take marketshare away from traditional, full-servicebanking institutions that fail to adapt:

    Niche Digital Provider

    Digital, Full-Service Bank

    Big Box Bank

    A few of todays full-service traditionalproviders will have the foresight andfinancial and operational wherewithal toevolve from their existing market position

    While banks are currently in anextremely dynamic operatingenvironment, other industries haveundergone similar disruption, andwinners have emerged. In some casestraditional players completely redefinedthemselves to remain relevant, whilein other cases new entrants tookdominant roles as they revolutionizedthe customer experience in the gapsthat traditional players left unoccupied.

    For example, the telecom industry hasbeen upended in the past 20 years bynew technology, evolving consumerpreferences, and industry convergence.And like banking, telecom is heavilyregulated. Traditional providers likeAT&T have been forced to evolvesignificantly, through divestitures,mergers, and restructuring. Yet AT&Tis the largest communications holdingcompany in the world, with revenuefrom wireless, wifi, high speed Internet,voice and cloud-based services.Meanwhile, new telecom entrantslike Skypeowned by Microsofthavecarved out a profitable niche as well.

    The Telecom Parallel

    Skype now handles a significant portionof the worlds global phone traffic.And the convergence between mediaand cable have allowed a company likeVerizonitself once part of AT&T duringthe Ma Bell periodto soon beginairing National Football League gamesover its customers smart phones.2

    The telecom industry offers severalclear lessons. First, digital technologyaccelerates the pace of change, all but

    requiring players to become more agilein order to continually adapt. Second,the era of scale, particularly physicalscalei.e., winning through size aloneis over, and today, leaders win byfinding innovative ways to improve thecustomer experience. Last, innovationis keycompanies that fail to innovateand adjust to industry disruptions willmiss key opportunities for growth.

    into one of these models. Others will beginmaking the required investments to alsomove in that directionadvancing theirexisting business models to effectivelycompete with new competitors.

    Those that do nothing and try to cling tothe status quo risk losing significant marketshare and leave themselves vulnerable